How to assess and optimize public climate spending? Exploring options for Latin America and the Caribbean

The unprecedented challenges posed by climate change demand immediate and effective action by governments and finance ministries to address the challenges of mitigation and adaptation.

Addressing the climate crisis will require aligning between 7% and 19% of annual GDP, which will represent spending between $470 billion and $1.3 trillion in infrastructure and social spending by 2030, with a view to achieving sustainable, resilient and decarbonized development goals. In addition, an IDB study found that pursuing decarbonization actions in the region could bring $2.7 trillion (million billion) net benefits by 2050. Luckily, part of this effort will consist of redirecting existing flows, and the benefit of this redirection will far exceed its cost by avoiding the worst impacts of climate change and generating economic, social, fiscal, and environmental benefits.

In this context, climate public expenditure assessment becomes a fundamental tool to ensure that public funds are used efficiently and effectively to address this challenge.

What is climate public expenditure assessment?

Climate public expenditure assessment involves a detailed analysis of how public resources are being allocated and used to address climate change. This assessment goes beyond simply tracking how much is spent on climate initiatives. It involves analyzing the extent to which national public budgets invest in the decarbonization and climate resilience goals set by each country and under the Paris Agreement, as well as assessing their effectiveness and efficiency, i.e., whether expenditures achieve their objectives, whether they are optimized to deliver the desired outputs, and whether they are allocated to the areas with the highest priority and most significant benefits.

In Latin America and the Caribbean, several countries such as Paraguay, Argentina, Costa Rica and the Dominican Republic have worked on identifying their climate expenditure through budget classifiers under the IDB’s Conceptual Framework for the Classification of Public Expenditure on Climate Change. However, to date, no country in the region has begun to systematically evaluate its public climate expenditure.

Why is it essential to evaluate public climate spending in the region?

1. Alignment with global and national goals: Countries in the region have committed to reduce greenhouse gas emissions and increase their resilience to climate impacts. Assessing public climate spending allows governments to measure how much of their budgets are aligned with these goals and where adjustments are needed.
2. Identification of gaps and needs: Through this assessment, governments can identify areas where funding is insufficient or ineffective, allowing for a redirection of resources and the implementation of new policies or programs. It would also allow the identification of investments that have a negative effect on decarbonization or adaptation efforts, such as fossil fuel subsidies or those that inadvertently incentivize unsustainable water usage.
3. Resource optimization: Public resources are limited. A detailed assessment of climate spending ensures that money is invested in areas with the most significant potential impact, avoiding waste and maximizing environmental, social, and economic benefits. It has been found, for example, that investing or redirecting spending on resilient infrastructure would incur a small incremental cost of approximately 3%, yet would yield an average of $US4 benefit for every dollar invested.
4. Transparency and accountability: Public expenditure assessment can contribute to transparency in allocating and using funds for climate action. This not only strengthens public confidence, but also facilitates national and international accountability under the new UN Enhanced Transparency Framework (ETF).

How could we evaluate public climate spending?

To address these challenges, the countries of Latin America and the Caribbean, together with the Inter-American Development Bank (IDB), within the framework of the Regional Climate Change Platform of Ministries of Economy and Finance, are currently developing methodological guidelines for the evaluation of public budget expenditures, which are pioneers of their kind. This framework is based on a three-level stepwise approach that facilitates a comprehensive and detailed analysis.

1. Level 1. Analysis of budget structure: This level focuses on analyzing the extent to which the programmatic structure of the budget as a whole is responding to the transformations and interventions required in decarbonization and adaptation to address climate change. It is then a big-picture analysis of allocative efficiency, i.e., understanding whether the right things are being spent on the right things.
2. Level 2. Programmatic analysis: This level seeks to analyze the effectiveness with which budget programs are implemented in technical terms and their contribution to climate objectives. To this end, the analysis examines the degree of integration of climate action in the design of individual budget programs.
3. Level 3. Project analysis: This level focuses on determining how each project contributes to the reduction of greenhouse gas emissions and resilience to climate change impacts, and measuring its specific impact where appropriate, using internationally recognized indicators and methodologies. For example, methodologies such as Cost Benefit Analyses have proven very useful for ex-ante measurement of projects in terms of environmental and social costs and benefits.  Similarly, water resources or flood modeling tools such as Hydro-BID can be very useful in understanding the impacts of climate change at a project scale.

The evaluation of public climate expenditure is not only a technical tool, but a strategic necessity for the countries of Latin America and the Caribbean. It allows governments to optimize the use of their resources, comply with their international commitments, and, above all, ensure that their investments generate a positive and long-lasting impact in the fight against climate change. In addition, one of the fundamental principles of the methodological guidelines is their flexibility, recognizing that each country faces unique challenges and has different resources and capacities, which implies that the implementation of these guidelines may vary significantly according to the local context.

Therefore, implementing the methodological guidelines proposed by the region’s Ministries of Finance and the IDB is a crucial step towards a more sustainable and resilient future. Through rigorous and transparent evaluation, governments can ensure that every investment made effectively contributes to building a more resilient and equitable world.